Headline earnings per share clarification

All JSE-listed entities are required to present this number and its related reconciliation to earnings per IAS 33 Earnings per Share (IAS 33) in their financial reports as the JSE believe there is still a large demand from users in general for a clearly defined reference number which can be used for reporting and comparative purposes.

The circular is a rules-based document with no room for variation or application by association.  Yet there seems to be several misconceptions as to what headline earnings does and does not include as well as how and where it should be included in the financial statements.

To simplify things, here is a summary and extracts of the Circular 1/2023 Headline Earnings the latest circular released.

Circular 1/2023 replaces Circular 1/2021, effective for financial periods (interim and/or annual periods) ending on or after 30 June 2023. The new rules, all relating to the application IFRS 17 to headline earnings and concluding that remeasurements in profit or loss and reclassification of remeasurements from other comprehensive income to profit and loss are not adjusted for in the headline earnings determination, shall be applied consistently with the transition approach adopted for IFRS 17 Insurance Contracts (IFRS 17). If IFRS 17 has been early adopted, the IFRS 17 section of the circular should be early adopted as well.

The definition1 of headline earnings is rather long and complex, in essence it is an additional number that can be used as a performance measure permitted by IAS 33. In determining this number, one starts with earnings as determined using IAS 33 adjusting it for the re-measurements allowed per the circular, included below for your convenience, net of tax (current and deferred) and non-controlling interest.

Important things to remember when dealing with headline earnings

  • Headline earnings per share may not be presented on the face of the statement of profit or loss and other comprehensive income [Paragraph 27].
  • Diluted headline earnings per share must be presented with equal prominence to the headline earnings per share and must be presented in the notes in accordance with IAS 33.73 [Paragraph 16]. Headline earnings are adjusted for the same items as earnings to measure diluted headline earnings [paragraph 23].
  • Companies are not permitted to override a rule even if they believe that the operating/trading and the rule is inappropriate for their specific business [Paragraph 19].
  • Auditors of JSE-listed entities have an obligation to modify their audit opinion for non-compliance with the headline earnings circular where omitted or incorrectly applied [Paragraph 15].

Calculating headline earnings

Headline earnings is calculated starting with the basic earnings number calculated in terms of IAS 33 and then excluding all re-measurements that have been identified in the table below as relevant to the entity [Paragraph 17].

Remeasurements

The table below is extracted from the Circular with the ‘Item’ quoted directly from it. Only the items that cause earnings to be adjusted to determine the headline earnings (adjusting items) are included within this table, these are considered to be re-measurements (or might mistakenly be regarded as re-measurements). For the reasoning behind the decision to exclude the items, and the related definitions please refer directly to the Circular. In many instances the reason for exclusion is that the amount is a re-measurement that has not been specifically included.

Table of detailed rules per IFRS for which earnings are adjusted to determine headline earnings

Standard/ InterpretationItem

IFRS 3

Business Combinations 

  • Impairment of goodwill
  • Gain recognised on bargain purchase.

- Gains or losses on deemed disposals of joint ventures and/or associates.

IFRS 5

Non-current Assets Held for Sale and Discontinued Operations

  • Discontinued operations: post tax gain or loss on

-         Remeasurement to fair value less costs to sell (paragraphs 20 – 24); or

-         disposal of discontinued operation.

  • Gains or losses on non-current assets or disposal groups (as a whole) held for sale including subsidiaries, joint ventures and equity-accounted associates. This is not applicable to assets and liabilities not in the measurement scope of IFRS 5.  E.g., financial assets are excluded from the measurement scope of IFRS 5, any measurement adjustments would follow the IFRS 9 rules for headline earnings.

Impairment of assets or group of assets no longer considered to be held for sale.

IFRS 6

Exploration for and Evaluation of Mineral Resources

  • Impairment and/or reversals of impairment.

For retirement/disposal of the asset see IAS 16/ IAS 38.

IFRS 9

Financial Instruments

  • Hedge of a net investment in foreign operation: Reclassification from other comprehensive income to profit or loss.

IFRS 10

Consolidated Financial Statements

  • Gain or loss recognised when control of a subsidiary lost.

IFRS 11

Joint Arrangements

Joint operations: Look through approach – apply rules applicable to the IFRSs specific to each item.

Remeasurement of interest in:

-         Joint operation: Apply the IFRS 9 rules.

-         Joint ventures: Apply the IAS 28 rules.

IFRS 16

Leases

Lessees

  • Right of use asset: Impairment and reversal of impairment.

Remeasurements of the right-of- use-asset classified as

-         Property, plant and equipment: no impact as not in profit/loss;

-         Investment property: Apply the IAS 40 rules.

Lessors

  • Operating lease: Impairment and/reversals of impairment of the underlying non-financial assets.
  • Sale and leaseback: Gain/loss recognised on transfer of rights to the buyer/lessor (Transfer of the asset is considered a sale its treated as a disposal of property, plant and equipment).

IAS 12

Income Taxes

  • Adjustments to deferred tax balance for change in tax rates relating to items that were excluded from headline earnings. 

IAS 16

Property, Plant and Equipment

  • Impairment and/subsequent reversal of impairment.
  • Gains/losses on disposals.
  • Compensation from third parties for property, plant and equipment items that were impaired, lost or given up (initial recognition and subsequent measurement) excluding the effect of time value of money.

Gains and losses on sale of assets previously held for rental, now transferred to inventory are not excluded from headline earnings.

IAS 21

The Effects of Changes in Foreign Exchange Rates

  • Net investment in a foreign operation and monetary assets/liabilities treated as part of the net investment: Reclassification from other comprehensive income to profit or loss.

IAS 27

Separate Financial Statements

 

IAS 28

Investments in Associates and Joint Ventures

  • Gain/loss recognised on the disposal of an associate/joint venture.
  • Look through approach: Apply the rules applicable to the applicable standards for equity-accounted earnings of associates/ joint ventures. E.g., a gain on disposal of an item of property plant and equipment by an associate is excluded from headline earnings, i.e. the IAS 16 rule is applied.

IAS 36

Impairment of Assets

  • Any impairments and/subsequent reversals of impairments covered IAS 36.

(Current assets are scoped out).

IAS 38

Intangible Assets

  • Impairment and /subsequent reversal of impairment.
  • Gains/losses on disposals.
  • Compensation from third parties for intangibles that were impaired, lost or given up (initial recognition and subsequent measurement) excluding the effect of time value of money. 

IAS 40

Investment Properties

  • Fair value or other IAS 40 remeasurements.
  • Fair value adjustments on transfer from investment property to another category of asset in terms of paragraph 57.
  • Any other adjustments and re-measurements in terms of this standard.

For gains/losses on investment properties held by life/long-term insurers, refer to Section I: Sector-Specific Rules for Headline Earnings - Issue 2.) 

IFRIC 17

Distributions of non-cash assets to owners

 

SIC 25

Income Taxes – Changes in the Tax Status of an Entity or its Shareholders

  • Change in tax status: Current and deferred tax consequences included in profit or loss that relate to items excluded from headline earnings in the current or prior period(s).

Headline earnings reconciliation

The reconciliation of headline earnings to the reported earnings included in the notes to financial statements must be based on the earnings number and not a “per share” basis [Paragraph 27]. It must be presented in the “long form” in the annual financial statements or in the “short form” in results announcements [Paragraph 28].

The “long form” requires disclosure of the gross and net amount of each re-measurement to be excluded from headline earnings. [Paragraph 28]

The “short form” requires disclosure of the gross amount of each re-measurement, with the interest and non-controlling interest effects shown in aggregate and additional commentary provided to ensure the users can understand these amounts. [Paragraph 28]

Examples of these disclosures are provided below as extracted from the Circular.

Long form headline earnings reconciliation example [Paragraph 30]:

 GrossNet
Profit attributable to ordinary equity holders of the parent entity

 

XX

Less undeclared cumulative preference share dividends and related taxation

 

(XX)

IAS 33 earnings

 

XX

Less IAS 16 gains on the disposal of land and buildings

(XX)

(XX)

Less IAS 16 gains on the disposal of plant and equipment

(XX)

(XX)

Plus IAS 38 impairment of trademarks

XX

XX

Less the re-measurements included in equity-accounted earnings of associates[1]&[2]

(XX)

(XX)

Headline earnings

 

XX

Short form headline earnings reconciliation example [Paragraph 31]:

 Net
Profit attributable to ordinary equity holders of the parent entity

XX

Less undeclared cumulative preference share dividend and related taxation

(XX)

IAS 33 earnings

XX

Less IAS 16 gains on the disposal of land and buildings4

(XX)

Less IAS 16 gains on the disposal of plant and equipment4

(XX)

Plus IAS 38 impairment of trademarks4

XX

Less the re-measurements included in equity-accounted earnings of associates2&3

(XX)

Total tax effects of adjustments

XX

Total non-controlling interest effects of adjustments

XX

Headline earnings

XX

1For definitions, please refer directly to the relevant circular [Paragraph 14].

2If material, an analysis must be given of the different types of re-measurements for the equity-accounted earnings.

3If it is impossible to obtain the actual tax amount from the associate, this fact should be stated, and details of any assumption made in determining the tax should be provided.

4These are the gross amounts, before taking account of the related tax and non-controlling interest.

06 September 2023

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